Q1 2021 ABM Industries Inc Earnings Call
Greetings and welcome to a B M industries first quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the form of presentation and that anyone should require operator assistance. During the conference. Please press star zero.
And your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Susie Kim Vice President and Investor Relations and Treasurer. Thank you you may begin.
Do you all for joining us this morning with US today are Scott Salmon here is our president and Chief Executive Officer and Alex.
Ellis, our executive Vice President and Chief Financial Officer issued our press release yesterday afternoon, and announcing our first quarter fiscal 2021 financial results.
A copy of this release and an accompanying slide presentation can be found on our corporate website.
Before we begin I would like to remind you that our call and presentation today contain predictions estimates and other forward looking statements are.
Our use of the words estimate expects and similar expressions are intended to identify these statements. These statements represent our current judgment of what the future holds while we believe them to be reasonable. These statements are subject to risks and uncertainties that could cause our actual results to differ materially.
These factors are described in a slide that accompanies our presentation as well as our filings with the S E T.
And the question of this call certain non-GAAP financial information will be presented and that.
And of those numbers to GAAP financial measures is the day.
At the end of the presentation and on the company's website under the Investor tab.
I would now like to turn the call over to Scott.
Thank you Susie good morning, and thank you all for joining us today to discuss our first quarter results.
As you read in Yesterdays press release 'twenty 'twenty, one is off to a tremendous start total revenue was approximately $1 $5 billion.
<unk>, a seven and a half percentage declined versus last year, which exceeded our expectation and reflects.
And that's continued sequential improvement.
Anticipated our aviation segment remains the primary driver behind the revenue decrease.
And both the GAAP and adjusted basis earnings grew by 160% or more year over year GAAP, continuing EPS grew to $1 10 per share or a dollar one seven per share on an adjusted basis.
Adjusted EBITDA margin expanded more than 400 basis points to eight 3% compared to last year and.
Recurring these results was elevated demand for higher margin workhorse and a virus protection as well as our enhanced claims services, which are longer term in nature.
Net of Labor management continued to be a lever for profitability as you may remember the majority of our contracts are performance based so any efficiencies, we find and staffing and occupancy drops or schools or in a hybrid situations and horse to our benefit.
This is the advantage of having a flexible labor model.
And I will discuss our segments and more detailed but overall our industry group drivers are similar to what we saw during the balance of last year.
Not surprisingly our aviation and technical solutions segments were challenged by the pandemic.
And as decreased global travel and limited site access for retrofit projects and educational facilities.
Education is the segment, though grew top and bottom line during the quarter, which shows how well our team has adapted operationally to the hybrid learning system.
And business and industry and technology and manufacturing are still strong outperformance and they've been able to offset COVID-19 and related revenue compression with higher margin work orders and enhanced clean contracts and labor management.
And we're now almost at the one year Mark since the start of the pandemic and I've just summarized our fourth consecutive quarter of strong results.
This sustained performance suggests that we have reached a level of consistency and our results and stabilization across our client portfolio.
Let me now provide some thoughts on where we believe the operating environment and is headed.
In light of our full year guidance.
Before I dive into what momentum to normalcy looks like in 2021, I want to underscore that and I don't see it does not imply less vigilance around virus protection.
Over the past several months there have been countless news and scientific journals reminding us that COVID-19, and its after effects will continue to linger over the foreseeable future.
Many believe it will be a permanent fact of life with people get them regularly vaccinated.
And how we handle flu vaccinations.
We're still enthusiastic that vaccine rollouts are underway across the country.
Most importantly, the vaccines will save lives.
But the Rollouts will also lead to momentum back to work school travel and attending entertainment venues.
However, vaccine rollouts have not been uniform on a state by state basis more have state policies are masking public gatherings and other factors that impact of infections and new cases.
These factors as well as the ongoing discovery of new variants highlight how societies need to respond to COVID-19 on an elevated level and not and in the near term.
This is why it's so critical for us to partner with our clients and assess their evolving needs and engage our expert advisory panel and.
And being high and vaccines will spur momentum back to work, which for US means a return of more traditional janitorial work as well as the continuation of just infecting given higher occupancy.
Currently average occupancy across the country is approximately 15%.
We anticipate this could increase to 25% by labor day, and grow to 50 plus percent through calendar year and.
And as clients begin to plan their returns they are focusing on building trust and their facilities through health and safety protocols and rigor around cleaning.
Affecting and especially physical spacing will be incorporated into their plans.
For this reason and we do not anticipate and near term reduction in space utilization across commercial real estate, especially with class a buildings and blue chip clients.
For a sector like education, we believe the hybrid model will be and effect for at least the rest of the school year. Soon if not already institutions will start planning for the fall 'twenty 'twenty, one semester with a push for more in person and learning and the K through 12 segment and higher Ed.
How this unfolds could vary by region we.
We should have a better line of sight when we speak to you after our Q2 earnings.
And I'm sure as vaccine adoption continues to expand there's probably no sector more poised for robust volume recovery and aviation.
We are definitely hearing about pent up demand for personal travel and minimally a modest return of business travel for ABM.
And our business portfolio consists of both airlines and airports.
As airports will open during the pandemic operations and areas like terminal cleaning transportation and shuttle services enabled us to mitigate reduced volumes on the airline side and ultimately this diversification helped us breakeven last year, which was a major achievement.
And when the airline side current travel volume sort of approximately 50% of pre COVID-19 levels.
Assuming the vaccine rollouts gain traction we believe we could see that grow moderately by year end.
Both airlines and airports the increased traffic and the need for disinfection.
And this protection and enhance clean will grow.
On an enterprise level, we constructed a pulse survey of approximately 200 clients last month that largely aligned to our own and full year expectations. Most respondents are expecting their facilities to more fully reopen and their companies to be endorsing re occupancy and varying forms.
And by September.
And they plan to continue taking multiple measures to protect spaces against COVID-19, as they reopen.
Similarly, and the areas of surface and air disinfection.
And even with the interest and flexible work schedules and work from home protocols.
The vast majority of our clients say they expect a total amount of space utilization to remain largely the same day.
And the size of our survey, it's just the subset of our client base, but it supports what we are hearing more broadly as we communicate with our customers on their future plans.
It also speaks to our confidence and providing full year guidance today for.
For fiscal 2021, we are introducing full year guidance of earnings per diluted share of $2.85 to $3.10 or $3, two and $3.25 on adjusted basis.
Our outlook for adjusted EBITDA margin is six 6% to 7%, which compares to 6% last year.
We also expect a return to growth by the second half of this year and consistent demand for high margin work orders and enhanced cleaning services through year end.
We also anticipate retaining most of our labor arbitrage through year end.
Yeah, our successful not translate to complacency there.
Just on how the pandemic has changed our trajectory we've been capitalizing on our momentum to elevate our brand and business.
At the end of February we launched Abiam's first national TV commercial.
As a celebratory moment for the entire firm and we could not be prouder, if you've not seen it on CNBC or Bloomberg TV you can find it on our IR website today.
As we discussed last year, we're going to be investing and our clients team members and infrastructure.
We're focused on providing technology and data analytics capabilities to enhance client and team member experiences.
We're also prioritizing areas like towers development to further empower our people and create even more consequential relationships with our clients.
We are committed to building upon our strong culture and fostering a community of Boeing where team members feel connected valued and inspire.
This reinforces our mission and vision as an organization and we will have significant long term commercial outcomes for us.
Internal initiatives, such as our culture and inclusion council are dedicated to driving meaningful social change and cultivating and inclusive environment for everyone at ABM and.
And we're taking active steps to turn this vision into reality.
Excited to share that we have entered into partnerships with organizations that are focused on building a more equitable society.
<unk> has made a commitment to support the and double HCP legal defense and educational firms.
And the Hispanic scholarship fund.
The after school Alliance and the third good Marshall College Fund.
We are partnering with these organizations and an effort to make a difference and the areas of advocacy and civil rights.
Human needs education and workforce development.
Before I turn the call over to Earl.
And so look back at this time last year during our first quarter earnings call of 2020.
We would share starting to discuss the corona virus and its impact on the economy.
At that time, I reiterated how our diversified portfolio coupled with our nimble operating model. We are hallmarks of our long term success over the past 110 years.
Our results over the past 12 months has proven this beyond a doubt and with our solid liquidity and leverage we are better positioned than ever to pursue growth and profitability that will unlock even greater shareholder value.
I want to thank our employees for another quarter of absolutely incredible execution, particularly those who are impacted by the recent winter storms and the SaaS.
Whose dedication of the ABM team continues to fuel our performance quarter after quarter, we have a culture like no other in our industry and.
In addition to our team members and I'd like to thank our board of directors, including our newest director Quincy Allen for their guidance and encouragement.
I also thank you our analysts and shareholders for your support during a time when the environment was particularly opaque.
I'm proud that our results has been the greatest proof point of our resilience and agility and excellence.
I'll now turn the call over to Earl.
Thanks, Scott and good morning, everyone. Let me start by thanking all of my fellow ABM team members for the warm welcome I've experienced since joining the organization.
Day marks my 100th day, and ABM and my early impressions about the organization's drives to collaborate and execute has only grown.
As I continue to evaluate and assess our business needs. My main area of focus will be unhealthy to determine the appropriate and enablers for both strategic growth and continuous improvement.
And I will discuss in more detail shortly our strong results over the past several quarters, coupled with our leadership position and the marketplace provides us with great opportunity to invest and our future growth potential.
I look forward to finalizing our thoughts on areas such as our internal investment strategy and sharing with all of you over the course of the year.
Now onto the results.
Revenue for the quarter was $1 5 billion a decrease of seven five per cent compared to last year.
The decrease in revenue reflects the continued impact COVID-19 has had across our business segments.
As a reminder, the pandemic had not yet impacted operations significantly until our second quarter last year and as such this quarter reflects the full year over year impact.
Partially offsetting this revenue decline was the ongoing demand for higher margin disinfection related work orders and enhanced cleaning services.
Work orders and were particularly strong within our business and industry and technology and manufacturing industry groups.
On a GAAP basis, our income from continuing operations was $74 6 million or $1.10 per diluted share compared to $27 9 million or <unk> 41 last year.
In addition to our strong operational performance the increase versus last year was driven by favorable development in prior year self insurance adjustment.
We saw an $11 $4 million benefit this year compared to $6 $6 million and the first quarter and fiscal 2020.
Additionally, we saw our second consecutive quarter of current year positive insurance trends recording a benefit of approximately $3 million.
On an adjusted basis income from continuing operations for the quarter increased to $68 $3 million or $1.01 per diluted share compared to $26 $2 million or <unk> 39 last year.
Our GAAP and adjusted earnings growth versus last year continues to be driven by significant increases and higher margin work order and enhanced cleaning services.
And our clients have incorporated health and hygiene services, such as disinfection into their operation at higher levels.
We continue to experience higher margin as a result of direct labor efficiencies as our operators and proactively manage the deployment of labor commensurate with COVID-19 related revenue decline.
Additionally.
And also reflect one less working day, which amounted to labor expense savings of approximately $6 million.
Other items, such as corporate discretionary expense amortization and interest were also lower compared to last year.
These results were partially offset by our planned infrastructure and organizational investments in areas such as <unk>. However.
However, I want to note that our investments and for the quarter was approximately $4 million, which was lower than originally anticipated.
During the quarter, we generated adjusted EBITDA of approximately $124 million for a margin rate of eight 3% compared to $68 8 million or four 3% last year.
I will now discuss our segment results.
As I referenced earlier these results reflect the ongoing impact of COVID-19, which has resulted in revenue compression across our services.
Scott discussed our diversified segment structure has been a strength for us during the pandemic at each segment has been impacted by the pandemic and different ways.
Both positively and net.
In most cases, though with perhaps the exception of technical solutions. Our segment results reflect some combination of a mix shift towards higher work orders and enhanced cleaning services labor modulation on lower service demand as well as operational investments in areas such as enhanced claims.
DNI revenue was $809 4 million, which was down just $11 5 million or one 4% versus last year.
The parking and sports and entertainment businesses, where the predominant drivers of the revenue decline due to the ongoing pandemic.
Almost entirely offsetting this decline were increased demands for higher margin work water and enhanced cleaning services and our national accounts and certain client and corporate sectors, such as financial institutions.
Operating profit for the quarter reflected this more favorable mix of business, resulting in $85 $7 million or a margin of 10, 6% compared to last year at $38 2 million and four 7% respectively.
Technology and manufacturing remains one of our most resilient segment.
PNM produced solid results for the quarter as it has since the beginning of the pandemic.
The segment reported revenue of $249 2 million and increase of six 5% versus last year with an operating profit of $26 9 million for a margin rate of 10, 8%.
[noise] work orders and enhance clean services drove demand for T N N, particularly within the industrial and manufacturing pharmaceuticals and high tech sectors.
We also experienced growth with our logistic clients as we supported them during the peak holiday season.
Our education segment grew revenue to $209 $4 million with operating profit of $21 5 million or 10, 2% March.
We believe these results reflect some stabilization and schools have continued the hybrid learning model that has been and effects since the back half of last year.
Performance was primarily attributable to direct labor management due to a modified staffing levels and other expense savings as well as demand for disinfection and Covid related work force.
Looking ahead, we anticipate some re institution of a traditional selling season in 2021, which did not really exist last year due to the pandemic.
We continue to monitor how schools are going to evolve their approach to teaching and the current environment, particularly at vaccination Rollouts progress.
Aviation reported revenue of approximately $143 million with operating profit of $3 2 million.
As anticipated this segment remain most impacted by COVID-19, and its effect on global travel.
The quarter saw a modest sequential increase and travel due to the holidays, but also reverted quickly due to lockdowns and areas such as the U K.
We continue to operate and according to flight and passenger demand and providing higher tech services, such as electrostatic spraying as we manage variable costs and expenses on a real time basis to match demand.
Finally, technical solutions reported revenue of $113 million versus $142 million last year.
This decline was driven by site access issues as clients, such as and education continue to limit traffic into their facilities in order to protect administrative staff teachers and students.
However, backlog remains healthy above a $150 million and we remain focused on churning through these projects as soon as possible.
Operating profit was $6 million or five 3% on a margin basis.
Turning to cash and liquidity, we reported positive cash flow during the first quarter. Despite this traditionally being a cash flow negative period.
This even includes the deferral of approximately $31 million and payroll taxes from the cares act, we generated more than $45 million and cash flow from operations and free cash flow of approximately $39 million per quarter.
Our strong performance enabled us to end the quarter with total debt, including standby letters of credit of $851 million and a bank adjusted leverage ratio of one eight times.
Additionally, we ended the quarter with cash and cash equivalents of $378 million.
Given the consistency of our leverage and cash position over the last several quarters. We believe we have reached a point of stability, both operationally and financially.
As a result, we are evaluating our capital allocation priorities.
In addition to organic investments and our business. We are also exploring the M&A market for potential targets to drive growth and build on our current momentum.
While remaining cognizant of our reentry into M&A, we will also consider share repurchases opportunistically.
We currently have approximately $145 million remaining and our authorized share repurchase program and we will balance any potential activity with our M&A efforts to ensure maximum flexibility.
During the quarter, we paid our 219th consecutive quarterly cash dividend of <unk> 19 per common share for a total distribution of $12 7 million to.
And to shareholders.
And as stated in our earnings release, our board of directors approved our 220th consecutive quarterly cash dividend.
Now turning to our guidance outlook.
We are introducing a fiscal 2020, one GAAP guidance outlook range of $2 85 to $3 and Tencent and on an adjusted basis $3 to $3 25 per share.
And <unk> shared with you some great context from an operating perspective that supports our guidance. So let me now provide some additional assumptions behind our guidance.
Given our performance during the first quarter, we believe revenue will continue to improve sequentially with a return to growth and the back half of the year.
And as growth improves and turned positive we will have to staff back up accordingly.
Therefore, there may be a partial reduction and the level of labor efficiencies, we have experienced over the past year.
But make no mistake, we do expect to retain a portion of these savings based on new opportunities and labor management practices, we have adopted during COVID-19.
And as it relates to higher margin work orders and enhanced cleaning services.
We do not anticipate a material slowdown and demand for the balance of the fiscal year.
We expect our investments to pick up throughout the remainder of the year as we support the strategic initiatives, namely in our it transformation.
On a year over year basis, we do expect and increase in corporate expenses for the year, although timing may vary from quarter to quarter as you saw in the first quarter.
Additionally, as a reminder, we undertook furlough and expense reduction efforts during the third quarter of last year and as such expect to see year over year increases and expenses as we have resumed a portion of those expenditures.
We are still and the planning and design phase of our technology roadmap and we will update you as we finalize our plans.
I'd also like to remind everyone that we will see and extra working day, and Q2 and one less working day and Q3.
Each working day should represent approximately $6 million of labor expense similar to Q1.
Moving to taxes, we continue to expect and effective tax rate of approximately 30% for 2021.
This tax rate does not include discrete tax items, such as the work opportunity tax credit and the cash impact of stock based compensation Awards.
At the end of December what was formally extended by Congress through 2025, and current estimates suggest a $5 million or <unk> <unk> impact on 2021.
And finally, while we are not guiding to free cash flow until we can finalize the impact of our tech transformation on capital expenditures I want to express my enthusiasm for the strong start to the year.
Given our strong cash flow performance to date, we believe we'll be able to achieve a range above our historical $175 million to $200 million.
And look forward to updating you as we finalize our longer term plan.
In closing, we're excited about our performance for the quarter.
As well as our outlook for the year and we look forward to updating you on our continued progress next quarter. Operator, we are now ready for questions.
Thank you.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment and may be necessary to pick up your handset before pressing the star he is.
Please standby, while we compile the kiln.
Our first question and from Sean Eastman with Keybanc capital markets. Please proceed.
Hi team Scott.
And certainly a strong start to the year.
Pretty impressive.
I guess I guess, along those lines and my first question is.
If we just look at the annual guidance.
And you guys are off to a head start here with the first quarter, implying around 30 over 30% of earnings and the first quarter versus.
Kind of a high teens number on average over the last 10 years and the first quarter.
So I'm just curious where you think you.
And you might need to have some conservatism in there.
Given this head start I mean is it really just.
And the labor efficiency dynamic.
Revenue recovers is it the technology investments ramping up any color around the cadence would be helpful.
Yeah, I mean, I think you hit it and you hit it right on the head and I think predominantly we have to remember it's early right. We just finished Q1 and we have we have some nice line of sight into Q2, but.
And it's early and the year and we wanted to be responsible right. So I think we'll always have and opportunity as we go along to update if we need to Sean but for now I think we feel real comfortable where we are.
Okay got it and.
And the capital allocation comments are interesting.
Just around the stability and where leverage is.
Curious what.
And acquisition could look like for you guys.
Maybe it's early there as well but.
Just a bit of a flavor for what you guys are looking at.
And what kind of.
Supplement to the organic growth recovery.
Do you envision it would be helpful to understand that.
Sure I mean look for us.
We're looking in two primary areas first building into our core which is janitorial and if anything COVID-19 has really elevated that core. So that's something that we're excited to look at and then also.
And our Acs group.
We love, we love that Division, we love where.
Society is heading towards energy efficiency sustainability and electric vehicle charging. These are all our major work streams. There. So we've talked about in the past that we want to build our geographic footprint across the U S. So I could see us doing some fill in acquisitions, there as well so and that's kind of where our focus is at the mall.
And that those those two areas core janitorial and Etfs.
Okay, and then one last quick one from me.
Yes, I mean.
Guys have exposure to EV charging.
You have exposure to.
Energy efficiency and buildings to clear priority areas from the New administration I mean have you seen the etfs bid pipeline firm or.
Is that sort of a stay tune too early.
Look we have a really strong strong pipeline and a strong backlog and.
The new administration's attitudes towards the things I, just talked about sustainability and energy and match them and are great and it really goes beyond the administration right and it's.
It really goes to society right and it's just it's playing into all the right trends and if you remember the ACS group also does a fair amount of work and educational facilities and you all know how strained budgets are for schools K through 12, and frankly higher Ed.
And so we come and we're really good energy saving solutions and.
You've heard us talk before about proof points of literally saving teachers' jobs saving after school programs. So we think that there is going to be good momentum towards selling energy projects into schools as well so.
Everything is pointing pointing up for us and Etfs, It's just for US right now.
Pediment has been access to facilities with Covid and we suspect we'll see a lot more traction and the back half of the year as the vaccines rollout and also of schools close we'll have a chance to get access and start churning that backlog and turning it into real revenue and.
Remember backlog of signed contracts. So we're super confident we have a very strong backlog and we just have to turn it into revenue by actually starting the project.
Okay. Thanks, Scott and I appreciate it I'll turn it over.
Thanks, Sean.
Our next question is from Andy Whitman with Robert W. Baird. Please proceed.
Great and good morning, everyone. Thank you for taking my questions I was just.
Hoping to just understand a little bit more again this quarter the driver of the year over year margin improvement last quarter. I guess, you said it was kind of roughly half.
Mixed benefit from tag and and and.
And hence clean and the other half was.
The benefit of Labor management was there any difference and the character of that particularly considering that some of the corporate investments also came in.
And we're and offset the other way.
Yeah, no. Thanks, Andy for the question.
And I'm very similar to what we saw last quarter year over year uptick that we're seeing and margin is driven by those two components. So firstly the labor efficiencies that we've been receiving as well as the higher margin associated with both work orders and enhanced cleaning services and that really attributed to 400 basis points of the year.
Over year accretion really again split 50 50.
In addition to that we saw the one less working day, which attributed to about 40 basis points, which was offset by incremental investments that youll see and the corporate expense line.
Got it okay, well given that and.
I appreciate the physical occupancy data that you guys shared the 15 go into 25 by Labor Day, I guess, you said and then by calendar year end and getting.
A lot more normal than that.
And that is a recovery and physical occupancy at the space, but I wouldn't say that that's any kind of sharp snapback or or major change very quickly and in fact that labor day represents most of the rest of your fiscal year, So given that and just doing some math on your guidance here.
Using your EPS guidance and some of the other known quantities here it looks like the balance of the year EBITDA margins are down pretty significantly and the knockdown up year over year up to historic levels down sequentially from a great performance and <unk> is what I need cash.
Covid and something in the mid <unk> for the balance of the year, So and that's a pretty big change. So I was hoping that you could give a little bit more meat on the bone other than.
Kind of what you said or in addition to what you said to get us comfortable with the fact that this is the right margin level to be thinking about for the balance of the year.
Yeah look again, we wanted to be responsible and and you know we are.
And we look at the remainder of the year and we do think theres going to be momentum back, which will cause us to lose some of the labor efficiencies, we get in the hybrid model predominantly and commercial.
Momentum back to the office so.
So and that's it and then we are going to be starting the corporate investments. We we have a slow start.
Q1, because we wanted to be super cautious with.
And we want to be Super cautious with the pandemic still remember our quarters like November December January right. So we will be starting to build in those investments and our strategy and it area and it's all for long term growth.
We are going into a growth mode.
And we need to support it with those investments.
Got it I have just one last question to follow up on kind of on the fundamentals of the business and demand last year I think it was defined by very very low customer loss very high retention and just kind of wanted to hunker down and not change anything and make sure that they do this you guys have talked a lot about how ABM, it's been well position with you.
Your processes and your leadership and the industry.
<unk> ability to take share I was wondering Scott if you could talk a little bit about the dynamics now that we're starting to think about reopened and are there more customers looking to switch providers.
But going forward now.
And that the world is a little bit more stable and just given that in.
And as they look to switch.
Are they also looking to bake into the base contract some.
Some of the work order.
It's been comes becomes so consistent and as part of what their processes.
Youre offering enhanced cleaning is basically.
The deeper level of cleaning, but are or are customers looking to switch and if they switch are they looking to bake and more content and what are the implications of that if they do on margins sorry for Barnes.
But you can find that.
Yes, I got the essence of this the short low Q1 was great retention for US, we were and that 90, 293% zone and.
I think earlier on and we were more cautious about a lot of rebids happening.
Certainly if theres one area would probably be education, because the one thing. We know there is the school budgets theyre, all constrained right and there'll be looking for opportunities. So.
And we.
We will expect to see a higher level of bids and education, but that's there's a plus side to that too right. Because all this other work is going to get bid out that we don't have right and we do love our platform now with our enhanced clean and so.
Where we may get a little pressured on.
On retention.
We may we may pick it up on the sales side and with enhanced clean it's not in the scope of work and we don't we don't as things get rebid.
For the first couple of years.
I'm not so sure how robust the bidding activity is going to be and what makes me think about that Andy is not only we are talking to clients, but on top of that.
Many of our clients have their space needs and flux in terms of how they're going to lay out the floors for distancing and and the different.
Use cases that are going to have when people come back. So I don't think there's going to be this rush to go bid right away until they understand the occupancy, but even still when it does get baked in over the next couple of years I don't think we're going to have too much of a deterioration on margin because if you think about enhanced clean is the people.
Are better trained because they are using different.
Different types of chemicals theyre using expensive equipment. So we believe between that and all the resources, we're putting in with our advisory panel that we're going to be able to maintain a good portion of our margins when and when.
<unk> does get baked them, but again I, just don't think it's going to be immediate because.
There's too many other drivers that are going to inhibit them from having this all out bidding.
Alright. Thank you for the comments have a good day.
You too.
Our next question and from Sam <unk> with William Blair. Please proceed.
Good morning, Scott ROE, how people up and doing well.
Good morning, and good morning.
Oh and another one for the margin.
Do you think that 2021, adjusted EBITDA margin is where profitability kind of peaks out for you guys. I know you mentioned some costs and going back throughout the year here basically I'm curious if your long term margin outlook five and half of 6% is kind of irrelevant now because the business is changing and 6% plus the new normal given customers on this high margin virus protection moving forward.
Yes, that's a good question. So I think for US if you remember pre COVID-19 that five 5% to 6% zone was where we were trying to gravitate to over the next two or three years. It certainly we believe that COVID-19 and kind of the virus awareness and society has.
Squarely put us into that $5, 5% to 6% zone, and we're going to be thinking about investing into our business over the next five years, we're going to do the things that we need to do to break out and Thats. One that is our ultimate goal, we always want to overachieve, but I think for now what we're really comfortable saying as we solidly landed it.
That zone couple of years ahead of where we wanted to be and the next phase we're finishing up 2020 vision now I think the next phase of our five year journey is going to outline the path to get out of that zone.
Great. That's helpful commentary, maybe switching gears and I've a quick one on P&I debt.
I assume there's a lot and cleaning and disinfection and work that must be done and preparation for some of these folks going back to work this fall.
And I'm wondering as far as it relates to your guidance.
Are you contemplating a significant step up and P&I related reopening revenue and your fiscal fourth quarter of this year.
Yes. So we do believe there'll be increased volume is there is a return to work and.
And the offsetting factor to that is we're going to have to staff up right. So we look at those two in conjunction with one another but there will definitely be elevated volumes as as people return back, but if you remember like with our fiscal year. We ended October 31, and we think at that time, we're going to be somewhere between that 25% to 50% of <unk>.
Occupancy so it's.
And that's probably going to be more like 22, when you're going to have a robust return to the office, where those levels will be elevated pass what we'll see in 'twenty one.
Got you and thanks for the answers guys.
Have a great day.
Our next question is from David Silver with C. L. King. Please proceed.
Yeah, Hi, good morning. Thanks.
Scott I wanted to follow up maybe on one of your answers here regarding retention rates. So.
Historically, you've been very clear about.
And pursuing high retention rates on your your annual contracts.
I'm just wondering if you have any early data, thus far and Mike on a couple of things first off the six months enhanced clean.
Contracts my sense is a lot of those are coming up for renewal and I am just wondering if you have some early read on retention rates, there and then maybe a more qualitative comment Rick.
Regarding the tag work, where the work orders.
And that Youre seeing so I mean, it's very hard to generalize, but is there seemingly a customer strategy evolving where maybe they.
Have a work order every couple of weeks or so or once a month.
Supplement the standard annual contract. So just some idea of the cadence there on the on.
Enhanced clean and the work orders and thank you.
Yes sure.
So look I think for us again.
And then sustained rate and if you look at our work orders and enhanced clean and we did $150 million of that and the first quarter as compared to $300 million all of last year. So we're excited about that and then.
And our renewals have been very strong on enhanced clean so far which is a really good time I think will boost even more powerful for us is when we surveyed our clients 90% of our clients said on reopening and Theyre going to do the same if not more virus protection, which is pretty incredible and then.
That to the next level, 85% of our clients said when they look out two years past the pandemic or more there can it.
Continue to be doing virus protection. So it kind of it kind of proves the thesis that we've been saying all along that.
And some extent Pandora's box has been opened around virus protection and awareness and been confirmed confirm and not only through the survey results, but as you can imagine we're constantly communicating with our clients about reopening plans and it just confirms what we're hearing and this in the survey so really optimistic.
And that helpful.
Okay.
Yeah, no that's great.
One quick one and then one strategic question with a quick one would be on the cares Act.
And I believe last year.
Cares Act allows you to defer roughly I think a 100 million or so of of.
Employee employment and taxes can you just.
Maybe remind me what can you update us on how that is going and how that went and the first quarter and then maybe from a fiscal year 'twenty one basis.
Will any of that accumulated kind of deferral need to be repaid so maybe the fiscal year 'twenty, one cash flow impact puts and takes on the cares act would be great. Thank you.
Yes, David Let me, let me address that.
And if we're starting if you look at the cash flow from operations this quarter.
We landed at about $48 million, which if you think about Q1. This is probably the first time in recent history that Q1 is actually generated positive cash as opposed to actually being a net debt.
<unk> cash and $31 million of that cash flow came from the cares Act. So if you look at what we did last year and 130 31. This year, it's about $161 million that will be repaid.
In two halves and the first half being next fiscal which is really December the end of December 'twenty 'twenty, one and then the following fiscal.
Paul and fiscal <unk>.
And the balance of that that amount.
Okay.
Okay, Alright, great I appreciate that and then last question would be more I guess the gist.
It's a multi tasking question first for you Scott.
When I think and your company here I think you have this big.
New opportunity or newish opportunity that you are moving aggressively to invest in and to exploit regarding the post pandemic business environment.
And then I also would say that within the last year you've also.
Initiated another significant and kind of longer term strategic.
Effort regarding your transformation programs.
And I'm just wondering as you.
Kind of steer the ship here.
And can those too.
A very significant high priority.
Efforts can they continue.
On without interruption is there some competition internally for resources, how does human resources view.
Billing senior openings on Jan one project or one effort versus the other.
And of course, your time to management attention. So.
How do you kind of manage I guess those parallel tracks.
On two high priority and frankly newer.
Efforts relative to how your company has been positioned over the past several years. Thank you.
No that's a good question.
And I don't know.
They are out of line to be honest I think they all are aligned together into kind of one vision going forward and the.
Way I think about it is we're going to have this this work stream and investing into the business organically and that's the enhanced clean and enhanced facilities and continuing to build excellence around that so you can have that but on.
And a parallel paths that we're going to be investing and in our Tac rate and.
Part of the Tech is infrastructure and it's kind of table Stakes right getting your data right.
Forming a framework around your technology, but.
That's really to accelerate and grow the business through client facing technology right. So we get stickier with clients and and that client facing technology can intersect with enhanced clean right in terms of tracking systems and dashboards. So so I think that's really important and then also to accelerate the business. The technology is going to work towards work for.
Management, getting our people more efficient and getting our people more data more more more more touch points with our clients because we're informing them and enriching them with the data that we're capturing so I think it really aligns well and we'll lay out and detailed the next five years and the coming months, but we're <unk>.
Really excited about our ability to invest and our people and to invest in technology and again, it's just going to come together beautifully and online. So we're really excited to talk about it over the next couple of months.
Alright, just one final comment, but I did want to call out I thought the slide deck that you put together for this call was exceptionally useful and helpful and and the opportunity to go through it last night was wasn't added plus so thanks for the extra effort I appreciate it.
And that's great. Thanks.
And we do have time for one more question.
Our final question will be from Marc Riddick with Sidoti and company. Please proceed.
Hey, good morning, everyone.
Good morning, Mark.
So let me also echo the.
The last comments the slide deck for those who haven't had the chance to see and so far I thought was exceptional and had a lot of great detail and really appreciate that.
Really appreciate all the commentary that you've already given but I wanted to touch a little bit on the investment.
Commentary because in addition to the investments that you've talked about I wanted to circle back to the <unk>.
That debt.
<unk> begun our national.
And our commercial campaign and I don't think Thats, a small thing for a company like century old two for the first time have a commercial so I was wondering if you can sort of talk a little bit about that thought process. What the branding opportunity that you see is and and and what kind of means for ABM.
And as well as what it means for enhanced cleaning and general.
Sure I mean look we were.
And you can imagine the price, we had rates and have a national TV commercial for free.
And like Us and and.
And it was so well done and we.
We get such great comments on it and.
I think its multipurpose rate part of it is just the commercial side of it meaning the commercial business side of it and we're already seeing web traffic up over 10% just from the commercial which is so that the payback is incredible and just from a branding standpoint, it just repositions, our brand and elevates our brand.
And especially what we're doing with with enhanced clean and and making sure people understand Mark that we're an essential service, where first responders and.
And we even say like with healthcare professionals they can't even.
Hospital care and opened two we've cleaned up right. So I think it's just so much for us on so many different levels, but.
It doesn't hurt when you get a pure financial payback and you start seeing web traffic up and that turning into actual business.
And then just just to be clear the commercial hasnt been out very long right and when does that hit the year.
Oh, It was just announced for like two weeks yes.
Yes.
Yeah.
I was sort of thinking about.
On top of the investing and commentary that you've made so as you're sort of thinking through the technology investments or what have you.
From a timing perspective, I would imagine that some of that we'll see later this year and then flowing into into next year and obviously you still got some decisions to make around that but is that a reasonable way to think about the technology spend that you haven't done yet.
Yeah. So mark just let me address that but when we look at the technology spend.
And part of it is that planning and design that we currently are investing against our future it infrastructure, which again will start with a rollout of the ERP system across the enterprise.
And right now and not going to do that in kind of like a big Bang approach, but rather will be a series of rollout, but presumably you could see.
And some deployment at the end of this year and then flowing into FY 'twenty two.
Okay, that's helpful and.
The so one of the surprises I guess.
Paul is the commentary around.
And the acquisitions and looking at acquisitions is.
Or more maybe more near term potential use of cash then that may be something unless we're thinking about and I appreciate you're including the commentary on the prioritization of what you might be looking at what's your current acquisition pipeline perspective is it too early to have begun to look at sort of what that pricing for those types of assets might look like.
Or how should we think about that.
Potential.
The range of opportunities that might be in front of you.
Yes. It is.
Probably a little early and different different assets have different ranges right like the Ats stuff is a little bit more price season, the janitorial and its because its higher growth higher margin right. So I think we have to synthesize all that and.
There's other things that we take into consideration.
Just besides multiple and pure financials. It's like is there a strategic component to it like with Ats, where I talked about expanding our footprint and filling in gaps that we don't have.
Or that we do have rather around the country. So we put all those together and bake it into our analysis, but its kind of early right now for us, but hopefully we'll have more to report on sales.
Okay and then the last thing for me as a year ago enhanced clean didn't exist and we were obviously and the different place right. So I wanted to sort of get a sense of when do we begin to sort of and look at.
Longer term, what enhanced clean could be.
And it seems as though there's a certain there's going to be a certain flow based on the types of customers that you have.
But it certainly seem to be encouraging from the other.
The survey data that you had in your slides and delight I wanted to get a sense of.
That survey work and the feedback that you're getting.
And how recent was that and do you get a sense that maybe some of the bigger picture issues like the like the stimulus money and alike.
Is that beginning to.
Be reflected back and the commentary that youre getting and customers. Thanks.
Yes, I think that one of the biggest knock on effects to this mark has been the elevation of our brand right because.
And what our competitors are doing a lot of the same stuff that we're doing but they're basically coming in and saying we can electrostatics fray right well, we can do that too, but when you when you take on.
And the enhanced clean program you get a different level of training you get signage with it right you get a different level.
The way you communicate to clients you could even have evidenced based testing when we're done to show whether or not we have been successful and.
And eradicating the COVID-19 and the space so.
And it all ends with.
Kind of the proverbial seal and the window that says this facility has been enhanced clean certified because you remember we talked about the fact that we put together and advisory panel so like.
I think the biggest push about this mark is that it kind of it separates us from the pack it really differentiates us as.
As you know.
We've talked about before a lot of our competitors are smaller regional companies. They don't have the resources that we have with the scale that we have on the supply chain. All those things are coming to four now that we're and this pandemic and its really in order to our benefit.
I appreciate it all the time share. Thank you.
Thanks Mark.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing remarks.
Yeah. Thank you I just wanted to thank everybody for being on the call and all the support and again want to thank our teammates for this incredible incredible performance and.
Again culture like no other really enthusiastic and we will look forward to being back in.
And Q2's to update you and in the meantime, just stay safe and don't let your guard down we're getting out of this so let's continue on everybody. Thank you.
Thank you.
Thank you. This does conclude today's conference you may disconnect your lines at this Simon Thank you for your participation.